Definition:

Deferred revenue is the advance payment from a customer for products or services that the company will deliver in the future. It is a balance sheet category on the liability side (as we still owe the customer for the services they have paid for). It can also be called Deferred Income.

Example:

A customer pays $120 as part of your company’s annual subscription plan for the following year. This $120 booking is considered a deferred revenue for your company. Each month $10 of revenue is recognised, and the deferred revenue line in the balance sheet is reduced by the same amount.

Why it matters:

Deferred revenue is a liability on the balance sheet, so sounds like it is a bad thing. However, encouraging customers to pay in advance (e.g. make annual subscriptions slightly cheaper than paying monthly) reduces the amount of cash you may have to raise from investors, as customers are lending you money instead, and may improve customer retention.